‘Government should ease tax rules around office Christmas parties’

As Christmas approaches, it’s time for HM Government to show a bit of goodwill to firms, employees, and the hospitality industry, say tax and advisory firm Blick Rothenberg. Robert Salter, a tax service director with the firm shares his thoughts.

The Government should relax the rules on Christmas parties (and similar events) and increase the amount which can be treated as ‘tax free’ each year from £150 per employee to £300 per employee.

There are a few factors that help justify this change. Not only has the existing £150 annual limit – which is a VAT inclusive limit – been in place since 2003 and is therefore massively ‘out-of-date’ but changing this limit would also provide businesses generally and the hospitality sector with some much-needed support, as they look to recover from the Covid pandemic.

“Increasing the limit to £300 per employee per year would help reduce the overall costs faced by employers and encourage employers to provide employees with a ‘genuine thank you’ for all their efforts. Specifically, a £300 per employee limit would mean that in most reasonable cases, there is no need for employers to report any taxable benefit-in-kind charge via a PAYE Settlement Agreement (PSA).

Where employers need to cover the tax cost of a Christmas party via a PSA they can face an effective tax liability (including taxes and NICs) of up to 107% of the core value of the Christmas party.

This can mean that the effective, cumulative cost to the employer of providing a Christmas party can easily in some cases be up to 200% of its headline, initial per head cost.

Employees need to ensure that they avoid making some ‘common mistakes’, when it comes to budgeting for their Christmas party. For example, the £150 value mentioned above is not an ‘allowance’. Hence, if the per head cost of the event is above £150, the full value of the event becomes a taxable benefit – and not just the excess amount over the £150 threshold.

The £150 threshold is an annual limit – and not something which applies purely on a per event basis. if a company provides a summer ball for staff and a Christmas party, for example, the employer needs to look at both events and assess whether the £150 threshold has been exceeded.

In this situation, if the summer ball cost £100 per head and the Christmas party £135 per head, firms would – if the event was genuinely open to all staff – be able to treat the Christmas party costs as ‘tax exempt’ as it is under the £150 threshold, but the costs of the summer ball would represent a taxable benefit and need to be recorded via a firm’s PSA with the Revenue. In contrast, if both events exceeded the £150 threshold – say £160 for the summer ball and £200 for the Christmas party the employer would need to report the full combined sum for each employee as a benefit on the PSA.

It can be a minefield. The tax-free amount should be increased, and the rules could be simplified.